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RBA content on the interest rate sidelines

Reserve Bank Board minutes: The minutes from the December 6 Board meeting shows that the Reserve Bank was aware of the risks of an weaker-than-expected September quarter economic growth outcome.

Reserve Bank Board cautious on the labour market: “There was still considerable uncertainty about the momentum in the labour market… Members noted that there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures.”

The Reserve Bank Board comfortable on the interest rate sidelines. “Taking into account the information that had become available over the previous month, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

What does it all mean?

The Reserve Bank Board minutes make for interesting reading. Although there was no significant surprise in views. Board Members were upbeat about the improvement in the global economy – particularly China and were also aware of the likelihood of the weaker domestic September quarter economic growth result.

Interestingly policymakers highlighted a couple of concerns at the time of the December 6 Board meeting – in particular the complications of “an appreciating exchange rate” on rebalancing the economy and “uncertainty about the moment in the labour market”. Since the Board meeting the Australian dollar has lost well over 2 cents (2.4 per cent) against the US dollar and is even 1.3 per cent lower against the trade weighted index.

Importantly the latest round of employment data showed a substantial rebound in full-time employment. No doubt it is still early days but the improvements would give policymakers a degree of comfort.

Looking forward it is likely that the lift in commodity prices should support medium-term employment in the commodity states.

The focus for central bank official would be on how the business investment profile shifts over the coming year. It is clear that a lift in non-mining business investment will be need to support broader economic growth.

Simply, interest rate settings are likely to remain stable until well into 2017.

What do the figures show?

Reserve Bank Board minutes:

“Members noted that the international environment had been more positive in recent months, while observing that significant risks to the outlook for global activity persisted. The Chinese economy had remained resilient, supported by expansionary fiscal policy and rapid growth in financing.”

“There was still considerable uncertainty about the momentum in the labour market. The unemployment rate had declined over the past year, as had measures of excess capacity that accounted for the number of additional desired hours of work. Part-time employment had grown strongly over the previous year, but employment growth overall had slowed. Members noted that there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures. This suggested that inflation would remain low for some time before returning to more normal levels..”

“Members noted that these factors had assisted the economy in its transition following the mining investment boom and that an appreciating exchange rate could complicate the adjustment.”

“Housing market conditions had strengthened overall over preceding months, although there was considerable variation across the country and between houses and apartments. Housing credit growth had picked up a little, particularly for investors..”

“Prices for a number of Australia's key commodities, including coking coal, iron ore and base metals, had increased noticeably over the June and September quarters, which had contributed to the increase in Australia's terms of trade of about 6 per cent over that period. Commodity prices had risen further over November, suggesting that an increase in the terms of trade in the December quarter was likely..”

“Taking into account the information that had become available over the previous month, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

What are the implications for interest rates and investors?

CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.

Could the next move in interest rates be a rate hike rather than a rate cut? It’s important not to get too far ahead. Inflation is still historically low. And while there is speculation of growth-focused policies in the US, they haven’t been fleshed out. However you get a sense that inflation has reached an inflexion point.